COLUMN-Beyond Brent-WTI: the new North American oil trade: Campbell

Wed May 29, 2013 11:15am EDT
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By Robert Campbell

NEW YORK May 29 (Reuters) - The North American oil trade is moving to a new, more intensely regional phase. For the next year, the main pressure point will not be at Cushing, Oklahoma, but rather in regional markets. Physical, not paper trades will be the most profitable.

Pipeline capacity at Cushing, which was formerly in deficit, has now reached a point where there is more capacity available going to more profitable markets than there is inbound supply.

The large overhang of inventories at the price settlement point for West Texas Intermediate on the New York Mercantile Exchange will be drawn down to make up the difference in supply and demand balances until major new sources of supply, such as Enbridge's Flanagan South pipeline, or the Pony Express pipeline conversion, start up in late 2014.

By and large, this scenario is now well known and forms the basis for traders' assumptions that the spread between Brent futures and West Texas Intermediate crude will continue to narrow as the stock overhang at Cushing is drawn down.

But that does not mean that the North American oil market has fully worked through the implications of the shale oil revolution. Far from it. Infrastructure at Cushing may be less problematic for the next 12-18 months but problems elsewhere are mounting.

For instance, the narrowing Brent-WTI spread has taken some of the wind out of the crude-by-rail movement in North Dakota, the origination point for some 500,000 barrels per day of rail-shipped crude.

Current market prices make it more attractive now for some Bakken producers to ship crude on the Enbridge North Dakota pipeline system that connects with the main Enbridge system at Clearbrook, Minnesota.   Continued...